Monday, December 31, 2012

A PR firm that works for The New Yorker Magazine sent me a sneak preview of this magazine's January 2013 article about how NYC will adapt to climate change. The piece is written by a fine NYU Sociologist named Eric Klinenberg. His very good book about deaths in Chicago from the 1990s heat wave has elevated him to disaster guru and I presume that this is why he was selected to write this. You can see that the great majority of his career research citations (which add up to 1,200 in total) are from that book.

His piece is filled with "human interest" subject profiles. Columbia's guru Klaus Jacob receives a long profile. Klinenberg then goes on at great length about the crucial role that social networks will play in helping us to adapt to climate change. I certainly agree that access to trusted information is a decentralized strategy for coping with new news. The most interesting part of his article relates to his claim that the cell phone network is fragile and can be knocked out in crisis. Given the key role that trusted information plays in allowing us to adapt to challenges, this is an important point. The Federal Government and FEMA should think about how to have an emergency broadcasting system so that households can be certain to be able to access key information during a crisis. In Gotham City, the Mayor knew how to contact Batman using that beam of light. Our engineers must be able to think of something similar?

To Klinenberg's credit, there is a fair bit of individual choice and behavioral change at the heart of his optimism about adaptation. As a sociologist, he focuses on social capital as the key adaptation strategy. He writes about the Chicago neighborhood that suffered less deaths in the 1995 Heat Wave than its adjacent neighborhood;

"The key difference between neighborhoods
like Auburn Gresham and others
that are demographically similar turned
out to be the sidewalks, stores, restaurants,
and community organizations that bring
people into contact with friends and
neighbors."

So, if we don't "Bowl Alone" , we can adapt to Climate Change? I would amend this statement to say that there are many strategies to adapt to climate change including migration, innovation, access to government information and social networks. This portfolio of strategies together helps us to cope with the "new normal". The key here is updating the probabilities in our heads about the new risks we face. Armed with these updated probabilities, risk averse people will seek out new coping strategies that may include talking to neighbors, putting your house on stilts, moving to higher ground that help you cope with a crisis.

Again and again in his piece, he places government as the key actor in charge of protecting us. I would guess this is because he has a Rawlsian focus and is mainly focused on how the urban poor will adapt to climate change. He knows that Don Trump will fly his helicopter to the higher ground.

Governments tend to care about physical places while people are focused on themselves. Klinenberg does not bother to discuss (perhaps because NYU is in the flood zone?) whether private sector incentives and zoning should be used to reduce the population density in areas at increasing risk due to climate change.

So, consider the Manhattan Subway. Built in the 20th century, I'm sure that the engineers would built it differently now if they could have a "do-over". Would Klinenberg support a multi-billion dollar investment in climate proofing this infrastructure? As a sociologist, how would he evaluate whether this would be a good investment of local tax payer $?

While Hurricane Sandy was quite a shock, Manhattan appears to be back on its feet just 2 months after the event. What does that say about resilience? The next shock will cause less damage because people will have learned many lessons from Sandy. To quote The Who, "We won't be fooled again".

Friday, December 28, 2012

An "intellectual" can write a review without having read the book or seen the movie. While I am not an intellectual, I have read this review of Matt Damon's Promised Land and I have a few thoughts to share. Now, I'm not a big city lawyer but I can tell that this Hollywood star believes that domestic drilling has significant localized environmental costs that those who are leasing their land to energy companies are ignoring.

So, let's sketch a simple rural social cost story and see if the Coase Theorem applies. Matt and Mike own adjacent properties. Matt grows cows while Mike doesn't do much with his land. A gas company offers Mike serious $ per acre for the right to drill for gas. Mike accepts. An unintended consequence of drilling for gas on Mike's property is that there is extra water pollution on Matt's land and Matt's cows get sick from this water pollution.

There is a basic property rights question here. If Matt has the property rights to healthy cattle and if it is low cost to establish that any cattle disease is traceable to Mike, then Mike will compensate Matt for any damage done to his cattle. If transaction costs and issues of accountability (perhaps there are several fracking sites within the area) make it cloudy and difficult to establish who caused Matt's cows to suffer, then Matt may be a victim of fracking. Does this mean that fracking should be banned in this town? An economist would ask;

1. what is the value of the land per year when used for fracking , call this $A
2. What is the value of the land per year when it is used for its next best alternative, call this $B
3. what is the total environmental damage caused per year to the town, call this $C

A Coasian would say that if A - B - C > 0 , then fracking should continue and Matt Damon has made a silly movie.

If A < B + C then fracking should not have been allowed in this town. If the land in the town were owned by one big "corporation" then no fracking would occur because the big capitalist would internalize the social costs caused by fracking.

The irony here is that the division of land into many smaller plots makes each small land owner have little incentive to internalize the externality. So, Matt Damon is implicitly a friend of the 1%! If there had been a single land owner and A < B+C, the frackers would never have been invited in and there would be no issue. UPDATE ---- To see this point, consider an owner of a suburban shopping mall. If Mr. Taubman believes that a new entrant (such as a dirty book store) will cause damage to the sales of other mall tenants then he won't let the entrant enter even if that book store would be profitable. The residual claimant, Mr. Taubman, internalizes the total profit effect of the entry.

Now, the dispersed small land owners could still reach the efficient allocation of resources if transaction costs are low and they can bargain with each other. If the dispersed land owners joined an association where they had to make group decisions, then this would nudge them toward the Coasian solution (i.e only invite fracking if A-B-C > 0). If they are decentralized folks who do not speak to each other, then the town's individually rational choices (i.e Mike leasing to the frackers) may lower the entire community's well being.

My office is 3 miles from Hollywood. I would be happy to meet with folks to go over the econ 101 of their plot lines before they make an irreversible investment of $25 million or more in a movie. My fee would only be 3 free tickets to a Westwood Village premier.

UPDATE: My mom has emailed me two comments about this blog post. She noted that the impact of fracking on neighbor's health and cows may be uncertain and take time to manifest itself. In this case, the "C" mentioned above becomes an expected present discounted value of social costs. If the land owners "know that they do not know" how to estimate this (because they have no previous experience with fracking) then a rational decision maker would run a field experiment and set aside perhaps 10% of the total land area and lease this to the frackers to see if fracking causes significant social damage. If the land owners do not know that they do not know the consequences of inviting the gas companies to frack, then this is the start of benevolent paternalism as we don't allow adults to make their own choices. Once we start down that path where do we stop?

Now, in this second case there is a role for well meaning, well trained environmental consultants to step in. If well meaning people foresee that the rural land owners "don't know that they don't know" the potential negative consequences of fracking then the consultants can play a positive social role as "free consultants" educating the people about the unintended health consequences before the land owners make their choices over inviting in the gas companies.

Thursday, December 27, 2012

The NY Times reports about extremely highly levels of ambient air pollution in the growing city of New Delhi, India. What is to be done? My co-authored ADB paper, "Green Urbanization in Asia" offers some suggestions. Here I want to list a set of possible feasible policy solutions.

1. Is transportation growth to blame for New Delhi's pollution troubles? Where are the coal fired power plants located? If they are close by, have these coal fired power plants invested in scrubbers?

2. What standards for oil refining has New Delhi introduced?

3. What share of vehicles have diesel engines? They create more particulates.

4. What is the age distribution of the vehicle fleet in New Delhi? Could there be a vehicle registration fee that is higher for older vehicles?

5. Could vehicle drivers face a different insurance cost depending on how many miles they drive each year? Those who drive less would pay less for insurance.

6. What is the gasoline tax in New Delhi?

7. How are parking prices downtown set? Could they go up?

8. How are commercial trucks regulated? In Los Angeles, they produce a lot of the particulate matter.

9. The Times article claims that much of New Delhi's pollution blows in from nearby unregulated areas. This is similar to the Hong Kong "imports" complaint. In New Delhi, is this true? Why is the Coase Theorem failing? Given the per-capita income and the total population of New Delhi, why doesn't this city pay for pollution control equipment in the "exporting nearby" cities?

Once New Delhi makes some pollution progress, I will be happy to come visit and lecture about the joys of pollution progress. If you are looking for a serious paper about environmental regulation in India, then read Greenstone and Hanna's paper.

As more New Yorkers move to California, this shifts who is the "median consumer" and provides incentives for stores and restaurants to raise their game in terms of variety and quality. If you don't believe me, then read this case study of bagels in Berkeley. Joel Waldfogel wrote an important paper about the median consumer and this should be required reading for everyone who cares about cities. The future of cities is as "consumer cities" as places where people want to live and have a high quality of life. Access to a variety of products is a large piece of quality of life and Amazon can't ship you fresh bagels (even on Amazon Prime!).

This "cute" bagel example highlights a deeper point. In this age of same day delivery, what parts of Manhattan's quality of life can't be cloned and transplanted elsewhere? If it all can be cloned and transplanted then will the real estate price premium in Manhattan vanish as you can now enjoy similar amenities in other cities with warmer winters? What is the scarce input that makes Manhattan great?

Las Vegas has shown that you can clone the Status of Liberty! Tacky? Maybe but does the marginal resident care?

The NY Times reports that innovative chicken raisers such as Scott Sechler are experimenting with mixing oregano oil into chicken feed in order to grow healthy chickens. This "organic" substitute for antibiotics may reduce bacterial disease in the chickens. Is this "treatment" effective? This is why we have clinical trials to test this hypothesis. While I am not trained as a Vet, I can imagine that when chickens live in extremely high population density that infectious disease is rampant. Treating chickens with antibiotics helps to reduce this infectious disease risk but introduces other risks for the final consumers.

Take a look at this picture. It looks like a Freshman dorm. The fascinating thing about "density" is that we are like Goldilocks. We want high density because it conserves on transportation costs and wasted resources but we worry about the congestion and infection cost of density. Vertical cities such as Singapore have shown that quality of life can be high in a dense city. Extremely high real estate prices in Manhattan reveal that the rich are willing to live like chickens if the coop is nice.

The case or Mr. Sechler highlights an optimistic view of evolutionary capitalism. His firm is aware that consumers are increasingly sophisticated about what chemicals are used to grow their food. In a type of product differentiation, he has identified a new way to make an old product (the chicken) that minimizes the use of the antibiotics. If organic chickens are labeled and if "organic chickens" sell for a price premium, then he will be rewarded for his efforts. As the Chicken consumers become more educated about the consequences of consuming foods without antibiotics, there may be a growth in such demand and the entire industry's overall sustainability may become greener because of a demand side push. This is a testable hypothesis. The same logic holds in the case of California's Green Chemistry Initiative. Competition and experimentation lowers the costs of achieving environmental objectives. This is what I meant in my quote in the NY Times yesterday regarding AB32.

Saturday, December 22, 2012

In this post, I will pose some questions that I know that I don't know the answers to. If you can answer these questions, then you will become an important environmental economist. I want more nerds to devote their scarce time to studying the micro economics of climate change adaptation so permit me to point you in some productive directions. This is my holiday gift for all of my friends and readers and you can't regift it on Ebay!

1. What new capitalist innovations will be most useful in helping us to adapt to climate change? Is it the old reliable of the air conditioner? Or will it be innovations that increase our water supply such as desalinization? How do we conduct event studies to quantify the adaptation benefits of such new products? One possible answer is that we will return to Simon vs. Ehrlich in tracking using market prices whether we are facing increased "scarcity" as the world's footprint continues to grow.

2. If information technology ranging from Tsunami Alerts to text messages to Smart Meters, provides us with real time information about new shocks, price spikes, and environmental alerts, will all of the population gain from such info or are there stubborn people who even when nudged do not respond? Do you treat those people as adults or do the benevolent paternalists step in and make decisions for this group?

3. Does competition in the insurance industry lead insurers to engage in "rational expectations" and updating their insurance premium policies to reflect evolving actuarial risk in flood zones and other places that climate change is shocking in new ways?

4. Across countries in the developing world, do farmers have rational expectations over climate conditions or do many of them have cobweb expectations such that they expect climate conditions tomorrow to be like yesterday? For those farmers with the skills to adapt to the new conditions, will their governments allow them to grow and capture the market? Is there any reason to believe that superior information will allow the "knowing farmers" to grow rich and thus have strong incentives to weed out the Homer Simpsons?

5. If international trade liberalization continues in food products, financial markets and labor migration, how much will such "free trade" help to reduce the social costs of climate shocks to any one region?

6. If housing supply regulation could be limited, where are the best places in the U.S to be investing in real estate in terms of climate amenities in the year 2075 and the low probability nasty fat tail shocks? By this I mean, in terms of relative risk --- which geographic areas are relatively safe? Where is the higher ground? When will real estate developers identify these areas?

7. Will activist federal government policy (think of New Orleans' new sea walls) slow down climate change adaptation by luring the public into remaining in risky areas? How important is "moral hazard"? How large are the implicit spatial subsidies built into the federal government transfer system and FEMA? Should national tax revenue be used to protect specific cities? Why shouldn't local tax revenue be used for this purpose?

8. How will Midwest farmers cope with climate change? What inputs can they introduce to offset Mother Nature? What adaptations can they engage in to reduce their exposure to climate risk? If they can hedge through futures contracts, how does this affect their risk?

9. From nations such as Holland that already experience flood risk, what can U.S coastal areas learn? How quickly will designs from such nations be imported and used in U.S architecture?

10. For existing coastal cities, how costly is it to retrofit infrastructure? Will officials use expected benefits and expected costs as their framework for deciding what are cost-effective investments?

11. How responsive is U.S R&D to anticipated future risks? Why did Mark Zuckerberg focus his efforts on Social Networks? Will future young nerds focus on climate adaptation solutions? How large a market is there for such solutions? Do we take the endogenous innovation hypothesis seriously or not?

12. In a nation with hundreds of cities, can shocks to any subset of cities significantly lower the nation's overall economic growth rate? For nations that are less diversified in terms of not having an open system of cities, what investments can they take to increase diversification? Will we see smaller adjacent nations merge into a larger geographic entity increasing migration opportunities?

13. Given that adaptation solutions often require new purchases, will the world's poor have the purchasing power to purchase them? What share of the world's population does not have the purchasing power to enable adaptation?

14. Does the invisible hand hold for climate change adaptation? Do we need activist government policy to accelerate adaptation or do we merely need a commitment to free markets and industry competition?

For young scholars who choose to work on these questions, I will help you to make progress here.

This NY Fed piece provides several case studies of employment dynamics in areas that experienced significant natural disaster shocks (h/t to Mark Thoma). Based on these cases, the economists are optimistic about the NY Region's post-Sandy employment dynamics. The event studies they present resemble the Blanchard and Katz state/year employment dynamics in their seminal Regional Evolutions work. Within a system of cities, we have many choices over where we live our lives and invest. This menu of choices provides us with implicit insurance against shocks and incentivizes geographical areas such as coastal cities to think about investing in resiliency so that brain drain through out migration does not take place. This is "small ball adaptation" through competitive markets rather than through a federal government Manhattan Project. In my ongoing migration work with Boustan and Rhode, we are exploring how migrants respond to disaster shocks.

Switching subjects, I was working at Stanford Univ. yesterday. It is paradise.

Wednesday, December 19, 2012

In today's WSJ, Matt Ridley has an optimistic climate change piece. Unlike my work on climate change adaptation, he ignores how capitalist cities, individuals and firms respond to an anticipated challenge. Instead, Ripley focuses on what we know about the function mapping aggregate global concentrations of CO2 increases into average temperature increases. Here is a quote:

"Given what we know now, there is almost no way that the feared large temperature rise is going to happen. Mr. Lewis comments: "Taking the IPCC scenario that assumes a doubling of CO2, plus the equivalent of another 30% rise from other greenhouse gases by 2100, we are likely to experience a further rise of no more than 1°C."

A cumulative change of less than 2°C by the end of this century will do no net harm. It will actually do net good—that much the IPCC scientists have already agreed upon in the last IPCC report. Rainfall will increase slightly, growing seasons will lengthen, Greenland's ice cap will melt only very slowly, and so on.

Some of the best recent observationally based research also points to climate sensitivity being about 1.6°C for a doubling of CO2."

Ripley does not bother to engage with Marty Weitzman's work on fat tails (see any of his post 2008 papers posted here). Weitzman's starting point is that we don't know the mapping from CO2 to temperature increases and that there are "fat probabilities" of truly horrible scenarios. A risk averse individual or nation might seek the insurance of carbon mitigation.

Ripley's certainty about a random variable strikes me to be quite strange and unlikely to encourage robustness and resilience. How does he "know that he knows" that function? I know that I don't know that function and I'm planning my life and investments accordingly.

Tuesday, December 18, 2012

As an undergraduate at Hamilton and during my first two years of graduate school, I was quite interested in the "consumption function". I dreamed of the permanent income hypothesis, the life cycle hypothesis and contrasted these models with the simple Keynesian marginal propensity to consume (which I would call the "Monkey Model" when I taught at Columbia) out of current income. If you hand a Monkey a banana, the Monkey eats the banana so if we fit the consumption model C = a + b*Banana + U for a large sample of Monkeys then a=0 and b=1 and we are done with consumption theory.

As I read the sports section of today's NY Times, this article about Ohio State University's athletes made me flashback to my roots from 25 years ago. This OSU setting offers an opportunity to test various consumption theories. If an OSU Econ Prof could access the data being collected at OSU, then this economist could write an AER quality paper. Permit me to explain.

As I understand it, for every athlete at OSU, the University can monitor inflows of cash into the checking account and outflows of checks for specific expenditures such as books, meals and tattoos. When players receive an inflow of $, do they immediately spend it and do they spend it on luxury items? The OSU prof can also study social networks, as one focal player (such as the captain of the football team) makes such a purchase do other players on the team follow him? In consumption theory, the unit of analysis is usually a household but at a University the right "unit of analysis" should be the social network. A OSU researcher who could access Facebook could see whether the player's network is tied to his friends or his team. The influx of cash on a specific date could be used as an exogenous event and allow for tests of hyperbolic discounting. For an example of such a study see Jesse Shapiro's 2005 paper. Unlike Shapiro's data, this OSU data would allow the researcher to study durables demand and to document "flashy" bling durables (see the work of Charles, Hurst et. al. in the QJE).

How many bloggers give out free AER papers? This blog has some value added?

Monday, December 17, 2012

Today's WSJ has an opinion piece by a prominent University of Chicago graduate. Cliff Asness argues that taxes affect investment behavior. As Washington prepares to make large changes to the tax code, Cliff argues that we need to anticipate the consequences of these tax changes. Many Keynesians implicitly assume that there is no behavioral response to changes in tax incentives and Dr. Asness disagrees. Here is a quote:

"The bond market offers particularly compelling evidence that people focus on after-tax cash flows when making investments and that they will, contrary to Mr. Buffett's assertion, alter their investment behavior based on tax rates. The yield on tax-free municipal bonds is almost always considerably lower than the before-tax yield on taxable corporate bonds of similar risk. Despite his claim that taxes don't matter, we can be sure that Mr. Buffett would not hold corporate bonds in his taxable portfolio if, before taxes, they yielded only the rate on otherwise similar tax-free munis.

This sort of investment decision is just one example of how taxes affect our actions. Consider that George Lucas sold Lucasfilm Ltd., including the Star Wars franchise, toDisneyDIS+1.00% this year at least partially to avoid a likely coming hike in the capital-gains tax. While Mr. Buffett is telling us taxes don't matter, here's proof that taxes are stronger than The Force."

Cliff may not remember but he took an econometrics class with me at the University of Chicago in the late 1980s. I remember that he was a tough guy with a real cocky attitude. I thought he was really smart. His performance at AQR shows that I was right. Cliff isn't the only hedge fund titan I know. Eric Mindich and I used to hang out in a quiet town called Scarsdale.

Are Cliff's views "self serving"? Yes --- of course but the shape of the equity/efficiency tradeoff frontier needs to be understood.

Saturday, December 15, 2012

Today, the NY Times provides a geography lesson for its U.S readers as it takes us to Sao Paulo, Brazil and introduces us to Jose Leonidio Rosendo dos Santos (JLRDS). JLRDS has the nasty habit of diving into the polluted Tiete and Pinheiros Rivers to look for stuff and thus is an expert on river water quality dynamics. An interested Environmental Kuznets Curve arises. As Sao Paulo's population grew and as slums emerged, people and factories directly deposited their waste in the rivers. For years, the city didn't bother to have a sanitation system and that meant that a lot of poop was directly placed in the river. All of this yields bad smells and what the rockband Cream would call "Strange Brew".

But, the story may have a happy ending! As shown in dozens of U.S cities ranging from Manhattan to Boston to Chicago, people like a high amenity city next to pretty (unsmelly) water. Using funds provided by the IADB, a cleanup effort is underway. I'd like to see some objective evidence of the water quality progress but tourist boats are now taking people on rides on the river. If Sao Paulo follows the U.S trajectory, restaurants, walking and shops will locate along the river's banks. A basic public finance issue arises. If Sao Paulo is a great mega city, why can't it afford to finance basic sanitation for the whole city? Is this an issue of finances or about denying slum areas access to slow down their growth? The Times names one area within Sao Paulo called Guarulhos as the epi-center of not having sanitation access. I see that the airport is there so this must be at the outskirts of the metropolitan area and the infrastructure is only slowly being built relative to the growth of the population. The Times makes an interesting point that the hilly topography of the area raises costs of providing services.

For my Brazilian friends, I have one question. As Sao Paulo becomes richer and more educated, will there be an urban middle class interest group pushing for "green cities" and the cleanup of the poop? Will politicians respond to such demand? Or, do the factories have the upper-hand in blocking regulation? In many other major mega-cities, dirty industry moves away from the big cities as transportation networks improve and center city land prices rise.

For teachers incorporating videos in your courses, I have recorded a youtube video on this case.

Friday, December 14, 2012

Labor economists have routinely documented the high economic returns to holding a college degree. The U.S has the world's best universities, so what is the issue? Apparently in a diverse society, there are heterogeneous rates of return to attending university and even those who attend the same university achieve different outcomes as they choose different majors and many allocate their time to consumption (i.e beer drinking) rather than heading to the library. Two recent news stories about Higher Ed caught my eye.

Story #1 raises a series of issues related to the Coase Theorem and the Arrow Impossibility Theorem. Given my position as a Visiting Scholar at NYU's Stern School, and having been a faculty member for 20 years at random places, I can provide some wisdom here. Ask yourself the following questions, who runs the University and what is the goal of the University? Two seconds of thought will convince you that universities are funky, they have a complex objective function with multiple stakeholders ranging from alumni, faculty, staff, prospective students, trustees and the administration. If important decisions must be made, who decides? Is majority rule the right way to make these decisions? Economists question voting because voting doesn't reflect the intensity of your preferences. Most University Administrations seek to pursue their own agenda while appearing to listen to "stakeholders". This takes a lot of meetings and there is a lot of eye contact as sincere leaders signal that they are listening, but are they? Did they take the job to listen to you? I don't think so.

In the case of the "vertical expansion" if NYU, some interesting overlapping generations issues arise. Consider a 50 year old member of the Economics Department faculty. He will say to himself; "I love the current funky NYU scene. This plan to create a "New NYU" will take 20 years to complete. Yes, it will look great and urban universities face severe land constraints that going vertical will solve but by the time NYU is done, I will be done. I have no stake in this plan. This plan confronts me with medium term pain and I won't be around in the long term". So, the problem is that the key stakeholders have a medium term perspective while the trustees and the legacy seeking President have a long term perspective. The Coase Theorem would suggest that if the professor have the property rights and can block this "progress", then the President must buy them out. But, what can he offer them?

Economists have not devoted enough attention to bargaining games with a nasty "time to build" component. China can get big projects done in ways that NYU may not be able to. How costly are such democracy impediments to our long run productivity? I don't believe that Manhattan has used its scarce land efficiently and NYU is an excellent test case of the interaction between land use controls and maximizing intellectual spillovers to achieve continued productivity gains. We want 4% GNP growth. How do we achieve that? In part by allowing NYU to go vertical.

Story #2; University borrowing. The NY Times forgets that interest rates are really low right now. It isn't crazy to borrow. I liked that Ohio State is issuing 100 year bonds. These universities are over investing in buildings rather than faculty. I would like to see a major university announce that it is borrowing $500 million dollars to fund 100 endowed faculty chairs. That university would rise in the rankings. Universities have forgotten what the words "comparative advantage" mean. Schools, including my own, need to get the Eye of the Tiger back and return to the core mission of teaching undergraduates and creating new research.

UPDATE: After watching this UCLA video, I'm now wondering if there is a crisis. Our priorities seem a little skewed here. I didn't see a library or a nerd in this video.

Wednesday, December 12, 2012

The NY Times reports that existing ski resorts are suffering because climate change has reduced the number of winter days below 32 degrees and the snow isn't sticking around. The tone of the article is that this is a disaster. A couple of obvious points:

1. Leisure activity is a zero sum game. If people in Boston stop going for leisure to a Vermont Ski Lodge then maybe they will substitute and travel to Mexico for a Winter Vacation. The money that was spent in Vermont doesn't vanish it would go to Mexican hotels and tourist spots. This helps Mexico to develop and offers global benefits in terms of reducing world income inequality and creating global stability. It is possible that these ski resort visitors will substitute a domestic vacation to Miami. The NY Times devoted no attention to "who wins" when climate change takes place. The Times doesn't have an economic model of what is the next favorite alternative for people who go to local Southern Ski resorts. Will these people go to Canada to Ski? Will they go to Mexico? Their $ doesn't vanish it just gets pocketed by somebody else. While ski resorts with no snow will be vacated, there are other ski resorts that will attract more business and their hotel rates will rise.

2. At the end of the article, the NY Times points out that profit seeking ski resorts are adapting by creating their own snow so this raises the question of why the Times even wrote this article? Does the Times have an investment in Ski Lodges near Boston?

3. As transportation costs fall for short flights, people can access a variety of destinations even if they are further from where people live. So, the people of Boston won't go for a 150 mile icy drive to access the Mountains in Vermont.

Of course there are incumbent losers from climate change . Ellen Hanak and co-authors have already documented this in this paper. Her paper's abstract:

"We use a hedonic framework to estimate and simulate the impact of global warming on real estate prices at North American ski resorts. To do so, we combine data on resort-area housing prices from two sources--data on average prices for U.S. Census tracts across a broad swath of the western U.S. and data on individual home sales for four markets in the western U.S. and Canada, each available over multiple decades--with detailed weather data and characteristics of ski resorts in those areas. Our OLS and fixed-effects models of changes in house prices with respect to medium-run changes in the share of snowfall in winter precipitation yield precise and consistent estimates of positive snowfall effects on housing values in both data sources. We use our estimates to simulate the impact of likely climate shifts on house prices in coming decades and find substantial variation across resort areas based on climatic characteristics such as longitude, elevation, and proximity to the Pacific Ocean. Resorts that are unfavorably located face likely large negative effects on home prices due to warming, unless adaptive measures are able to compensate for the deterioration of conditions in the ski industry."

My point is that we always have alternatives. You can take another job, another spouse, move to another city, eat at a different restaurant. If Mother Nature changes your choice set by removing certain alternatives, are you really made worse off? The answer is "no" if your favorite alternative is a close substitute for your favorite choice. If I wasn't teaching at UCLA, where would I be teaching?

In a couple of weeks, Matthew Holian and I will release a new NBER Working Paper titled; "The Rise of the Low Carbon
Consumer City". An article in today's NY Times manages to summarize the key ideas in our empirical paper. Here is a quote from the Times' piece;"Along with these real
estate projects, Midtown Detroit is also helping to attract or develop the
amenities that city dwellers want around their apartments, like bike paths,
parks where residents can walk their dogs, and places to eat and shop. A Whole
Foods is to open in midtown next year, and a light rail project is in the
planning stages."

Urban
density both facilitates consumption opportunities and encourages individuals
to drive less and walk and use public transit more. This paper melds insights
from both the “consumer city” literature and the “low carbon city”
literature.Using several data sets, we
present evidence supporting the hypothesis that global urban sustainability
is enhanced by downtown improvements in quality of life.We discuss possible causal channels for this
association.

Monday, December 10, 2012

In this piece, the NY Times tries to count sheep in the U.S West and to blame drought (and hence climate change) for the challenges this industry faces. But, the article highlights the solution to this challenge. While the U.S West may be suffering from drought and this has hurt domestic sheep farms, international sheep farms such as those in New Zealand are doing fine and are happy to export lamb to the U.S at a low price. The net result is that U.S consumers can enjoy this tasty dish even though the drought continues. International trade insulates consumers from idiosyncratic weather shocks. Thus, in this climate change era we need more free trade! I discuss this at length in Climatopolis. Free market environmentalism will become a dominant theme in the decades moving forward! Do I feel sorry for the domestic producers? No, sink or swim! Competition makes us stronger.

Returning the sheep article, the NY Times points out an interesting piece of industrial organization. It hints that the processors of sheep have some monopoly power. What is the barrier to entry?

"But some ranchers and officials in Washington believe that the deck was stacked against the sheep ranchers by the small and powerful number of feed lots that buy lambs, slaughter them and sell them to grocery stores and restaurants. Even as prices farmers received fell to 85 cents a pound, consumers at supermarkets were paying $7 or more a pound for the same meat. "

I would suggest that more structural IO economists should start to work on agricultural economics issues. There are gains to trade within the profession! For those of you who need a picture to stimulate your brains, the NY Times supplies this:

When I taught at Tufts University, Yannis Ioannides was one of my favorite colleagues. One of the world's top urban economists, he has a broad knowledge of both theory and applied economics. The depth and breadth of his knowledge is on display in his new Princeton University Press book titled From Neighborhoods to Nations: The Economics of Social Interactions. This rigorous 521 page book will nudge any Ph.D economist to the frontier of spatial economics. I believe that graduate students and faculty who work in industrial organization and international trade will greatly benefit from reading this excellent book. In this age of blogging and consulting, there aren't enough major economists writing a full length "treatise". Just because the median Internet reader has ADD doesn't mean that we suppliers should simply serve up bite sized pieces of ideas! I applaud that Yannis respects his readers enough to supply a very serious piece of work. We can all learn from his example!

Until I read this NY Times article about Taranto, Italy , I wasn't aware that manufacturing activity still took place there. Long time readers of this blog know that I'm a fan of the manufacturing to services transition. As I argued in my 1999 JUE paper titled "The Silver Lining of Rust Belt Manufacturing Decline", Pittsburgh is a better city today because the steel jobs left. Environmental problems have vanished in this "green city". Pittsburgh wasn't green at all in 1960 at the peak of steel. I understand that manufacturing pays higher wages than service sector jobs but there is a pollution externality associated with manufacturing that the service sector does not create.

Suppose that everyone is willing to pay $10 per day to not be exposed to the air and water pollution from steel production. Since Europe's population density is higher than other places, the same steel factory causes greater social damage located there than if it locates somewhere more remotely. I have never visited Taranto , Italy . There are always short run dislocation costs from shutting a factory. Such adjustments are borne by middle aged workers who have invested their human capital and social capital in that firm and town. Keynes said that in the long run we are all dead. An ongoing debate in economics focuses on how short is the medium term? Neo-classical economics makes optimistic predictions about how long it would take Taranto, Italy to recover. Blanchard and Katz's regional evolutions work would say 7 years.

Sunday, December 09, 2012

I've met some ambitious economists. A subset of these folks are looking for good questions to work on. In this video, I pose a puzzle that I don't know the answer to. I'm trying to answer it. A serious answer to this question would unify several branches of the social sciences (econ, political science, psychology and sociology) and would merit a free trip to Stockholm.

Saturday, December 08, 2012

December in Cambridge may be rainy and cold but I'm glad I'm here. Here are all of the economic history papers I listened to over the last 1.5 days at the Goldin Conference. Roughly 100 researchers attended. Having married a leading econ historian, and co-authoring an economic history book and several other economic history pieces, I have some credibility with this crew. Can you identify the dinner time speaker in the photo below? Perhaps I am not Andy Warhol? Despite my bad photography, I hope you can see Gary Becker. He gave a great talk about Claudia Goldin's contributions to economics.

During the conference paper presentations, I sat between Stan Engerman and Gary and we had ample time to talk about many economic issues. There were dozens of economists attending the meetings whom I deeply respect and I just kept talking and debating with new and old friends.

The endless talk about economics (which is distinct from gossiping about the profession of economics --- gossip no longer interests me so much) doesn't take place anywhere but Chicago and Cambridge. In limited doses, this is quite invigorating. After commenting on Ed Glaeser's paper on beliefs, we came up with a game plan for how to write a paper on environmental beliefs that builds on his work. Tonight, Paul Rhode and I head out for dinner to discuss our disasters research. On Friday night, I went to dinner with my co-author Danglun Luo and we discussed the two papers we are writing on environmental performance in China. Tomorrow, I will return to the sunshine of LA and try to make more progress.

For those who want to see what I had to say about the Glaeser and Ma paper, here are my slides. In 15 minutes, I tried to share my beliefs about beliefs. The more I think about this I actually believe this is a central issue in environmental economics. Given that I don't work on gender issues, I will leave it to the pros to decide how relevant beliefs are for the study of male/female choices and outcomes.

Friday, December 07, 2012

Here is a new piece in the December 8th 2012 issue of the Economist. Here is their 2010 review of my Climatopolis. As the main ideas of my book begin to be debated (after a two year lag!), I'm going to be a little bit more aggressive pushing my optimistic vision.

Wednesday, December 05, 2012

I'm not sure if any Econ Ph.D. students or faculty read anything but to help reduce the search costs for identifying good real estate and housing economics papers, here is a list of papers that I like. This isn't an exhaustive list. These are the papers that popped into my head within a few seconds of deep thought. If I have omitted your paper, I apologize. This list will expand over time so I encourage you to keep writing.

To my deep shock, I learned something today by reading the NY Times. This OP-ED by Andrew Kahrl is actually quite interesting. NY Times monopolists such as Gail Collins (with her fixation for Mitt Romney's dog) and righteous Nick Kristof could learn from Professor Kahrl how to use scarce resources efficiently. After reading Professor Kahrl's piece, I'm thinking of moving to Marquette University. That's a place with serious scholars.

For at least 20 years, I have lectured on the "tragedy of the commons" that takes place both in cities and in the oceans. Consider a smoker in a city, he gains $10 from smoking a cigar and he bears private costs of $2 from smoking because the cigar costs $1.8 and he recognizes that smoking causes him 20 cents of future health damage. He will smoke. If his smoking degrades the common air in the city such that 10000 people each suffer 1 cent of second hand smoke damage then his privately optimal choice causes a net society loss of surplus = 10 - 1.8 - 2 - 10000*.01 = -93.8 . This is a simple example of the tragedy of the commons --- this smoker unintentionally degraded the commons as he pursued his privately optimal action. The same logic applies to over-fishing in common oceans. One "solution" to this property rights issue is to privatize the commons and the owner would charge a price to allow the smoker to smoke and the smoker would only smoke if he is willing to pay this fee.

We can now evaluate Professor Kahrl's claims. He argues that the privatization of beaches in the Northeast is the reason that Hurricane Sandy caused so much damage.

He writes; "By increasing the value of shoreline property and encouraging rampant development, the trend toward privatizing formerly public space has contributed in no small measure to the damage storms like Hurricane Sandy inflict. Tidal lands that soaked up floodwaters were drained and developed. Jetties, bulkheads and sea walls were erected, hastening erosion. And sand dunes — which block rising waters but also profitable ocean views — were bulldozed."So Joni Mitchell said that we paved over paradise to put up a parking lot. As a first cousin of this claim, Kahrl is saying that capitalism and the pursuit of aesthetic beauty nudged us to drop our guard and destroy Mother Nature's coastal defense system. Such a defense system would have lived on had the area remained public property. For this claim to be true, he must assume that the tragedy of the commons would not have degraded such natural capital. This may be true.Mother Nature is now engaging in a takings as she tries to seize coastal property from incumbent owners. I say let her win. These place based stakeholders want to use your tax dollars as funds to build a wall around them. A compromise would be for the state government to buy these properties and knock them down and revitalize the natural capital adaptation strategies that the author lists. The property owners would take a haircut but the more inland coastal areas would be protected. Federal dollars are not needed for this adaptation strategy.

Monday, December 03, 2012

UC Berkeley has an excellent Economics Department faculty. From their faculty list, I count sixteen endowed chair professorships (and I'm not counting folks whose primary appointment is in the Haas Business School). In contrast, UCLA Econ has four endowed chairs. I believe that two are unfilled. I would suggest that as UCLA enters a period of serious private fund raising that endowed faculty chairs should be the main priority. UCLA has an excellent economics department but this resource differential between two comparable UC campuses says something. For those who are upset about inequality, focus your efforts on addressing this gap!

Sunday, December 02, 2012

Soon I will make a short trip to Cambridge, MA to celebrate a certain economic historian's contributions. The thought of flying from sunny 65 degree LA to cold and dreary Boston in December fills me with bad memories of bad weather. But, life is about tradeoffs. I'm looking forward to the conference and I expect that I will learn quite a few new things. This trip's miles will also qualify me as a United Premier Gold Member. As I get older, I like that stuff.